Web-docs.stern.nyu.edu



New York University

Stern School of Business

B10.3321.30, Spring 2007

Analysis of Financial Institutions and Financial Instruments

Professor Stephen Ryan (10-73 KMC, 998-0020, fax 995-4004, sryan@stern.nyu.edu, office

hours TR 4-6 and by appointment)

KMC 5-80, T 6-9

This course focuses on the:

1) financial analysis of bank-like financial institutions (thrifts, mortgage banks, and commercial banks); and the

2) accounting and disclosure rules for financial instruments they hold (interest rate risk disclosures, loan loss disclosures, fair value accounting for financial instruments, securitization accounting, derivatives and hedge accounting, and market risk disclosures).

The main goal of the course is to provide students with an in-depth understanding of how financial reports provide unusually accurate and detailed (but not perfect) information about the risks and performance of these financial institutions. Their financial statements increasingly are based on fair value accounting and their financial reports include increasingly extensive risk and estimation sensitivity disclosures. Both fair value accounting and risk and estimation sensitivity disclosures are necessary ingredients for financial reports to convey financial institutions’ risk and performance in today’s world of complex, structured, value and risk-partitioning financial instruments and transactions. While financial institutions often report imperfect (or worse) fair value measurements and risk and estimation sensitivity disclosures, careful joint analysis of the information they do provide invariably yields important clues about their risks and performance.

While this course is most relevant to students interested in financial institutions, much of the accounting material also pertains to varying extents to other types of firms. For example, many firms securitize their accounts receivable or hedge their commodity, interest rate, or foreign exchange risk using derivatives.

Notice from the attached course schedule that I interweave the financial analysis of different types of financial institutions with the accounting and disclosure rules that most directly affect these institutions. This sequence of sessions reflects my belief that a good understanding of a financial institution’s economics is a prerequisite for evaluating its accounting and disclosures and thus analyzing its financial reports. Throughout the course, I emphasize the use of financial reports for financial analysis purposes rather than technical accounting issues. I note, however, that some of the accounting and disclosure rules that we will cover (in particular, derivatives and hedging) are inherently complex, and that I do not avoid complexity when it is necessary for a good understanding of the topic.

Prerequisites: B09.2301 (Financial Accounting: A User Perspective). I assume the student has a working knowledge of basic finance, especially net present valuation and the operation of securities markets, and familiarity with financial reports. I recommend that students without such skills first take either B10.2303 (An Integrated Approach to Financial Statement Analysis) or B10.2302 (Financial Reporting and Analysis).

Requirements and Grading: There will be three take-home problems (cases based on public financial report information) with the following weight in determining your grade.

1. interest rate risk, credit risk, and fair value accounting 35%

2. securitizations 25%

3. derivatives, hedging, and market risk 40%

Each take-home problem will be handed out when I finish the relevant topic, regardless of whether I am on schedule or not. Class participation of the productive sort is encouraged and will be rewarded by one-quarter of a letter grade increase. I emphasize that productive participation does not require being either an expert or correct; for example, asking good questions is sufficient.

Required Text and Other Materials: There is no required text to be purchased this term because I have finished writing the second edition of my book, Financial Instruments and Institutions: Accounting and Disclosure Rules, John Wiley & Sons (hereafter Ryan), but it will not be available in print until April. I will instead hand out copies of the (pre-copy edited) chapters of the book that we will use in class. While these chapters are reasonably clean, there will undoubtedly be some rough spots. I will also hand out various other readings, most importantly, the financial reports of representative financial institutions. While somewhat tedious, I highly recommend reading these reports carefully from cover to cover as they provide considerable insight into the firms and their financial services industries. In contrast, most other readings can usually be skimmed. I will also hand out exercises and problems (usually with answers) for the financial analysis and technical accounting topics. While I only go over a subset of these exercises and problems in class, I highly recommend you work through them all, looking at the answers only after you have made your own attempt.

Blackboard/Access to Class Materials, Streaming Videos, and Prior Take-Home Exams with Answers: While I will hand out all materials needed for the course in class, the materials that are in electronic form (aside from the chapters of the second edition of my book, to which I do not hold the copyright) will be available on Blackboard. These materials include my class presentation slides (which I do not hand out in class), files for streaming videos of each class (for those who miss class), and prior take home exams with answers (useful to reinforce material as it is taught and as models for your take home exams). I do not use Blackboard for other purposes.

Course Schedule: The tentative sequence of class sessions is attached. Some of the readings and assignments will change over the course of the term.

Course Schedule (Tentative)

2/6 Course Overview and Background on Depository Institutions

Read: Ryan, Preface and Chapters 1 and 2

“Profit and Balance Sheet Developments at U.S. Commercial Banks in 2005”, Federal Reserve Bulletin, June 2006.

JPMorgan Chase’s regulatory capital disclosures in its Y-9C filings

I will primarily discuss the structure of the course and regulatory capital requirements in this session; while these items constitute a fraction of the material covered in the above readings, you should read them all as they contain relevant background information for the course

2/13 Thrifts

a. Read: Ryan, Chapter 3

b. Golden West Financial’s 2005 Annual Report

We will walk through Golden West’s report slowly on the second day of this session discussing the information the report contains. This exercise will be most useful to you if you have previously read through the report and identified what does and does not make sense to you

c.

2/20-2/27 Interest Rate Risk and Net Interest Earnings

a) repricing gap

b) interest rate sensitivity

c) analysis of net interest income

d) rate/volume analysis

Read: Ryan, Chapter 4

“Historical Yield Curve”, fixedincome.

Interest rate risk and net interest earnings disclosures from various financial institutions

Bring Golden West’s annual report to class

Prepare for class discussion: Evaluate and compare the net interest earnings and interest rate risk of Golden West and the other financial institutions with disclosures included in the reading package

2/27-3/6 Credit Risk and Losses

a) loss contingencies (SFAS No. 5)

b) impaired loans (SFAS Nos. 114 and 118)

c) transfers of troubled debt instruments (SOP 03-3)

d) SAB 102

Read: Ryan, Chapter 5

Bring Golden West’s annual report to class

Prepare for class discussion: Evaluate and compare the credit losses and risk of Golden West and the other financial institutions with disclosures included in the reading package

“SunTrust Banks – After the Restatement” case in Appendix 5A of Ryan

There is no class on March 13 (spring break).

3/20 Fair Value Accounting for Financial Instruments: Disclosures and Investment

Securities

a) fair value disclosures for financial instruments (SFAS Nos. 107 and 157)

b) partial fair value accounting for investment securities (SFAS No. 115) as amended (regarding other-than-temporary impairments) by FSP FAS 115-1 and FAS 124-1

c) proposal for fair value option

Read: Ryan, Chapter 6

Bring Golden West’s annual report to class

Prepare for class discussion: “Washington Federal’s Big Gap” case in Appendix 6A of Ryan

The first take-home problem (interest rate risk and net interest earnings, credit risk and losses, and fair value accounting for financial instruments) will be handed out in class at the end of the session in which the material above is completed (which may not be 3/20), and it will be due by the end of class two weeks later.

3/27 Mortgage Banks

d.

Read: Ryan, Chapter 7

Countrywide Financial’s 2005 annual report

We will walk through Countrywide’s report on the second day of this session discussing what the report contains. This exercise will be most useful to you if you have previously read through the report and identified what does and does not make sense to you

4/3-4/10 Securitizations

a) main rules (SFAS No. 140)

b) proposed standard on transfers of financial assets

c) servicing rights (SFAS No. 156)

Read: Ryan, Chapter 8

Bring Countrywide’s annual report to class

Prepare for class discussion: “Doral Financial’s Interesting Interest-Only Strips” in Appendix 8A of Ryan

The second take-home problem (securitizations) will be handed out at the end of the end of the session in which the material above is completed (which may not be 4/10), and it will be due by the end of class one week later.

4/10 Features of Structured Finance Transactions

a) consolidation of special purpose/variable interest entities (FIN No. 46R)

b) balance sheet presentation of transactions subject to netting agreements (FIN No. 39)

c) accounting for related transactions as a unit (EITF 98-15, DIG K1, DIG F6)

d) hybrid instruments (SFAS No. 150, SFAS No. 155, project on liabilities and equity)

e) financial guarantees (FIN No. 45)

Read: Ryan, Chapter 9

4/17 Commercial Banks

e.

Read: Ryan, Chapter 10

Excerpts from JPMorgan Chase’s 2005 Annual Report

4/17-5/1 Derivatives, Hedging, and Market Risk

a) Main accounting rules for derivatives and hedging (SFAS No. 133, 138, and 149)

b) SEC market risk disclosure requirements

Read: Ryan, Chapters 11 and 12

Derivatives, hedging, and market risk questions, problems, and cases

Bring JPMorgan Chase’s annual report to class

Prepare for class discussion: “Bank of America’s Derivatives, Hedging, and Market Risk” case in Appendix 12A of Ryan. I highly recommend working through all of the questions, problems, and cases in the reading package, however.

The third take-home problem (derivatives, hedging, and market risk) will be handed out on 4/24, and it will be due on 5/7 at 5 pm.

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download